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During the Great Recession, a record one in 88 homes in California were in foreclosure. This statistic represented a harsh reality for those who were unable to make mortgage payments. To make things more difficult, the housing market also took a nosedive, leaving homeowners without the ability to recoup losses through the sale of their homes.
One common theme during those difficult times was the “short sale.” A short sale, in theory, is a sale of property when the mortgage owed on the property is greater than the sale price of the property. In other words, a sale of the property will be “short” of the amount owed to the lender – hence the term short sale.
A short sale is advantageous, considering the circumstances, because it avoids foreclosure, which is generally costlier to the lender. In addition, foreclosure and abandonment cause blight to the surrounding properties, whereas a short sale is the sale of the house from one homeowner to another.
It also has tax advantages. A homeowner who uses the property as his or her primary residence and sells on a short sale is not taxed on the discharge of indebtedness. That is to say, suppose a homeowner sells the property for $150,000 on a $170,000 mortgage and the lender accepts the sale. Generally, such is called a discharge of indebtedness on the $20,000 and that money is taxable to the homeowner. For short sales, such money is not taxable.
In 2011, the California Legislature passed laws that created the short sale process in place today. While it is called a short sale, the process is anything but short.
The following are the applicable requirements:
- The homeowner must demonstrate financial hardship;
- The homeowner must be unable to refinance the mortgage; and
- In some locales, must put the house on sale to prove that a short sale is the only method of sale.
To effectively attain the right for a short sale, the homeowner must have permission from all lenders on the property. Often, a homeowner will take multiple mortgages against a property. All mortgage holders must agree to the short sale.
This is often one of the most pressing issues with respect to short sales. While the primary lender might feel better about a short sale because it can gain the most money and avoid blight, secondary lenders may not see it that way. Instead, secondary lenders may view foreclosure as the better option because it can be a faster process and produce a better price. Secondary lenders may have less interest in the neighborhood and are not concerned with blight.
California is a nonrecourse state, which means that homeowners are not liable to primary lenders for any deficiency against the sale of a house. For instance, if a borrower owes $200,000 on the mortgage and the sale price for a house $180,000, the lender cannot go after the borrower for the deficiency. However, secondary lenders are recourse lenders and may pursue the homeowner for the deficiency, which is a real factor during a short sale.
In debt? Considering a short sale? Speak with the debt relief firm of Melanie Tavare.
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